Suppose that your austerity measures are so good that they drive the deficit to zero. The next year, your debt-to-GDP ratio (debt/GDP) will still have the same debt in its numerator and a shrunken (negatively impacted) GDP in its denominator for a net increase in debt/GDP, which is the opposite of the purported objective of austerity measures! I have a tedious example here, at comment #5.

This is intended to arm the righteous with an explanation that can be delivered during an elevator ride.

MR. CARNEY: … The President’s budget will replace the sequester, which was designed to be bad policy for everyone with not just $1.2 trillion in deficit reduction, but $1.8 trillion in deficit reduction. In other words, it will go further than the sequester.

Emphasis added.

Let’s be clear about this. The terms “austerity,” “fiscal responsibility,” and “deficit reduction” are synonyms that refer to packages of tax hikes and spending cuts, which shift revenue from the private sector toward the government sector, thereby diminishing demand thereby and shutting down the economy, especially when those hikes and cuts are aimed at the 99%, e.g., the 2013 termination of the payroll-tax holiday.

Visibly, the self-congratulatory Obama White House is proud of their fiscal responsibility. But, as L. Randall Wray has noted, “fiscal responsibility” is something of an oxymoron, e.g., every time this nation has run a tax surplus, it was quickly followed by a depression — the one exception being the the Clinton surplus, which was followed by the somewhat delayed record-breaking recession that we are still in.

UPDATE: Per Tom Thumb’s post of yesterday, “Mr. Lew to Berlin: Don’t Do What Obama Is Doing Here”:

Treasury Secretary Lew goes to Berlin. Mr. Lew encourages Europeans to reduce their austerity measures because they are ruining their economies. He wants Europeans to spur their demand or spending.

[...]

NPR’s Mr. Green asks Mr. Lew (in Berlin) what he thinks about President Obama’s budget. Mr. Lew gives the official party response of how Mr. Obama has been offering the same budget policies for years and they are a reasonable mix of cuts to entitlements and increases in tax revenues. Mr. Green works really hard to ask about the similarities between austerity in Europe and austerity at home. But phrases like ‘long term fiscal constraint’, and ‘finding the sensible center’ act like intellectual razor wire and fill the interview with a wordsmith’s version of a room full of those small annoying plastic styrofoam packing pebbles.

It’s “fiscal responsibility,” “belt tightening,” and “pea eating” when Saint Barack pushes it. And, it’s dreaded “austerity” when Europeans push similar packages of tax hikes and spending cuts onto their 99%.

A little bit of arithmetic. An austerity (a.k.a. deficit-reduction) involves various tax hikes and spending cuts, but these hikes and cuts don’t always work as expected because they affect the economy, i.e., the GDP. To tell the GDP impact of eacand we simply tally up their sizes (in dollars per year) to determine how much the deficit will be cut. But, that often doesn’t work out each hike/cut will cut the GDP along with the deficit. To predict the GDP impact of a tax hike or a spending cut, we have multiply its size in dollars-per-year by its “multiplier.” Here, in order of size, are the multiplier that Mark Zandi gave Congress in 2008 to compute stimulus effects but they work equally well in both directions:

• Accelerated Depreciation 0.27
• Make Bush Income Tax Cuts Permanent 0.29
• Cut Corporate Tax Rate 0.30
• Make Dividend and Capital Gains Tax Cuts Permanent 0.37
• Extend Alternative Minimum Tax Patch 0.46
• =================separator=====================
• Nonrefundable Lump-Sum Tax Rebate 1.02
• Across the Board Tax Cut 1.03
• Refundable Lump-Sum Tax Rebate 1.26
• Payroll Tax Holiday 1.29
• Issue General Aid to State Governments 1.36
• Increase Infrastructure Spending 1.59
• Extend Unemployment Insurance Benefits 1.64
• Temporarily Increase Food Stamps 1.73

Notice that multipliers for hikes and cuts that mostly affect the wealthy (those above the separator) are about a quarter of the size of those that mostly affect the rest of us.

Application. So, let’s apply a multiplier to understand the significance of this from a recent HuffPo article by Mark Gongloff:

The second hit to income was the reinstatement of the federal payroll tax after a long holiday. The 2 percent increase in Social Security withholding cut nearly $127 billion from income in January, according to the BEA, Goldman Sachs economists pointed out (h/t Quartz’s Matt Phillips). The bump and decline in dividend income is a wash. The payroll-tax cut is going to be harder to shake off, leaving Americans with smaller paychecks for the rest of the year.

The higher payroll tax, along with the sequester budget cuts that will start to kick in on Friday, and other lingering effects of the “fiscal cliff” that loomed at the start of the year, will cut economic growth this year by 1.5 percent.

So, the immediate question is: how much of that prediction of a 1.5% cut to economic growth is due to ending the payroll tax holiday and how much is due the rest of the stuff, i.e., the sequester and the rest of the fiscal-cliff stuff? So we take that $127 billion per year payroll tax hike and we multiply it by the 1.29 multiplier that Mark Zandi gave for “payroll tax holiday,” and we get roughly $164 billion dollars per year, which is roughly 1% of our 16 trillion GDP.

So, two thirds of that predicted 1.5% cut to the GDP is due to ending the payroll tax holiday in January as part of the package to avoid the “fiscal cliff.” Which means that the sequester and ending the Bush tax cuts for the wealthy are predicted to have comparatively little effect on the economy, i.e., they and the other fiscal-cliff stuff make up only one third of the predicted drop in GDP.

Conclusion. Please compare the above to the shrill headlines that we got about the fiscal cliff and we are now getting about the sequester, and note that ending the payroll tax holiday, which got relatively little notice at the time, accounts for twice as much of that predicted 1.5% cut to the GDP as all the rest of these factors combined. The lessons are that:

• The media don’t report the difference between big and little in economic matters.
• Cuts and hikes that mostly affect the wealthy get major coverage but do not have much impact on the GDP.
• Cuts and hikes that mostly affect the rest of us don’t get so much coverage but have about four times as much “bang for the buck,” whether they are in a positive or a negative direction.

The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of G.D.P. through much of the current decade.
[...]
A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.
[...]
Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

Krugman also noted that “Columbia’s Joseph Stiglitz [is] a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored.” And, in his column earlier in the week (2/24), Krugman noted that:

[W]illingness to pursue austerity without limit is what defines respectability in European policy circles. This would be fine if austerity policies actually worked — but they don’t. And far from seeming either mature or realistic, the advocates of austerity are sounding increasingly petulant and delusional.
[...]
Nations imposing harsh austerity suffered deep economic downturns; the harsher the austerity, the deeper the downturn. Indeed, this relationship has been so strong that the International Monetary Fund, in a striking mea culpa, admitted that it had underestimated the damage austerity would inflict.

Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing.
[...]
Given all of this, one might have expected some reconsideration and soul-searching on the part of European officials, some hints of flexibility. Instead, however, top officials have become even more insistent that austerity is the one true path.

Thus in January 2011 Olli Rehn, a vice president of the European Commission, praised the austerity programs of Greece, Spain and Portugal and predicted that the Greek program in particular would yield “lasting returns.” Since then unemployment has soared in all three countries — but sure enough, in December 2012 Mr. Rehn published an op-ed article with the headline “Europe must stay the austerity course.”

Oh, and Mr. Rehn’s response to studies showing that the adverse effects of austerity are much bigger than expected was to send a letter to finance minsters and the I.M.F. declaring that such studies were harmful, because they were threatening to erode confidence.

All of which brings me back to Obama. I had just finished reading those two columns by Krugman yesterday (3/1), when Obama came on the TV denouncing the Sequester as an apocalyptic disaster, which is exactly what Krugman, Stiglitz, and Bernanke are saying. But, Obama continued a minute or to later:

Look, we’ve already cut $2.5 trillion in our deficit. Everybody says we need to cut $4 trillion, which means we have to come up with another trillion and a half. The vast majority of economists agree that the problem when it comes to deficits is not discretionary spending. It’s not that we’re spending too much money on education. It’s not that we’re spending too much money on job training, or that we’re spending too much money rebuilding our roads and our bridges. We’re not.

The problem that we have is a long-term problem in terms of our health care costs and programs like Medicare. And what I’ve said very specifically, very detailed is that I’m prepared to take on the problem where it exists — on entitlements — and do some things that my own party really doesn’t like — if it’s part of a broader package of sensible deficit reduction. So the deal that I’ve put forward over the last two years, the deal that I put forward as recently as December is still on the table. I am prepared to do hard things and to push my Democratic friends to do hard things.

Let’s be clear, deficit-reduction programs and austerity programs are the same damn thing. They inevitably consist of spending cuts and/or tax hikes, which are supposed to cut deficits but also cut the GDP. And, the vast majority of economists now agree that austerity/deficit-reduction packages are counter productive even when it comes to reducing deficits. That’s because, when they cut the GDP, they also taxes, which increases tax-deficits. The economics of this is well known and obvious.

What is also absurd in the President’s message is the portion that I highlighted above. He claims to what to “take on the problem [of deficits] where the problem exists — on entitlements.” But there are only two entitlements:

• Social Security, which has never contributed a penny to our deficits and is projected to be self supporting for at least the next two decades and, thereafter, to be able to support 80% of the current benefits.
• Medicare, which is an excellent program but is getting killed by the problem of per-capita health-care costs in the U.S., which are two and a half times greater than those of other developed nations and which will continue to exist no matter how much we cut Medicare. He deliberately avoided dealing with those during his so-called “healthcare reform” during his first term, choosing instead to cut political deals with the various healthcare cartels. Now those chickens are coming home to roost, and no amount of cuts to Medicare are going to make them go away.

So what should Obama do about our debt and deficits? On the near term, cover the deficits and pay down the debt with money borrowed at negative interest rates. But, in the long run, those rates will become positive and the “bond vigilantes” may insist on interest rates so high that we cannot afford them. So, in that case, we keep our borrowing down by what Lord Adair Turner, head of the British Financial Services Authority, calls “Overt Monetary Financing,” which can be accomplished under existing U.S. law 31USC5112(k) via platinum-coin seigniorage. (By now those who warn of bond vigilantes should have no more credibility than the boy who cried wolf.)

My bottom-line point is that we should repeal the sequester and NOT replace with cuts to Social Security and Medicare. Austerity sucks, even at reducing deficits. So let’s not do it.

Let’s put this sequestration monster, the most recent of the Obama/GOP fiscal boogey-men, into perspective. The Federal Reserve is now spending $40 billion per fucking month taking Mortgage Backed Securities (MBSs) off the burdened hands of the the nation’s banks. Compare that $40 billion per month to the one-year $42.5 civilian segment of the 2013 sequestration! Get the picture? This sounds like fucking nonsense. All of this wringing of hands and clutching of beads must be Kabuki crap. And Cenk is participating. Rachel is participating. Krugman is wringing his hands.

I’m not saying that a $42.5 billion cut in civilian benefits, etc. is a good thing, but we lost way more that twice that per year when the payroll tax holiday was shut down in January, and all the commentators celebrated that we’d missed the “fiscal cliff.” Now that cut is discussed as though it’ll be the end of the world.

Can’t these people tell the difference between “big” and “little”? Don’t any of them look at the numbers? What am I missing? Did I miss out on the kool aid?

The point is that we have no shortage of resources, so there’s no real need for austerity. And, the fact of the matter is that we can always coin more money. Below, I cover the ways that can be done within our current laws and look at the misinformation and disinformation that seem to be blocking that obvious solution.

Article 1 Section 8 of the U.S. Constitution empowers Congress to raise money to pay the government’s bills in exactly three ways:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; [Clause 1]

To borrow money on the credit of the United States; [Clause 2]

[...]

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; [Clause 5]

[...]

Here the verb “coin” is being used in the same sense as it is in “To coin a phrase …,” i.e., to invent, fabricate, or construct.

To the Treasury, Congress has delegated authority to coin money through the minting of coins. To all banks, Congress has delegated authority to coin money through the crediting of accounts in exchange for securities (e.g., IOUs including newly created loans). And to the Federal Reserve Bank, Congress has also delegated authority to coin money through the printing and issuance of “federal-reserve notes,” the only paper money now in circulation in the U.S.

Credit in a bank account is commonly called “money in the bank.” Credit in the Federal Reserve Bank should therefore be called “money in the banks’ bank,” but instead is called “reserve.” The Fed currently pays a modest (.25%) interest on reserves.

Since 1971, none of this money has been backed by gold or any other commodity; it is all fiat money, i.e., “money created from thin air.” Bank credit is, however, backed by the securities (mostly IOUs) purchased with it. The Treasury accepts all three forms of money (dollars) in payment of taxes, but vastly prefers checks against credit in bank accounts, which ultimately gets converted into credit in the Treasury’s General Account (TGA) at the Federal Reserve (Fed). And, the fact that the U.S. government accepts dollars and only dollars in payment of U.S. taxes is the key intrinsic feature that gives value to the dollar. In the words of Warren Mosler, “A dollar is simply a (transferable) tax credit.”

Money that’s coined by the Treasury gets deposited into the TGA, just like taxes. And the TGA is the account from which the Treasury writes checks to pay the government’s bills. Money also comes into the TGA from borrowing (i.e., the sale of Treasury bills and bonds), which incidentally increases the nation’s public debt bringing it closer to the limit.

Money that’s coined by the Fed results from the purchase of securities, mostly IOUs either pre-existing or newly created — the Fed simply credits the seller/borrower’s account or that of their bank. But, the Fed is not allowed to loan money directly to the Treasury, i.e., it cannot buy Treasury bonds or Treasury bills at the weekly auction. Rather, it must buy them on the “open market.” But, of course, it can and often does prearrange for one of the sixteen “primary dealers” to purchase on its behalf. And, with that minor bit of indirection, the Fed can and does loan money to the Treasury, but those T-bills and T-bonds that the Fed purchases still count toward the nation’s public debt, which is subject to the debt limit. Note that when the Fed goes on a campaign of buying up bonds of a particular type, that campaign is sometimes called “quantitative easing.” And, the Fed is now on the third of three programs of quantitative easing: QE1, QE2, and QE3.

The amount of money coined by banks is limited to ten times their reserves, including cash on hand. The amount of money issued by the Fed is not limited, and neither is the amount issued by the Treasury. But, until `1996, the denominations of the Treasury’s coins was limited to very small amounts, which imposed a de facto logistical limit on the amount they could issue. Since then, the denominations of platinum coins has been (perhaps inadvertently) left to “the Secretary’s discretion,” thus removing any logistical limit.

The issuance of fiat money by entities other than banks is often viewed as a sign of “fiscal irresponsibility” and disparagingly referred to as “printing money.” For example, per Ezra Klein:

[T]here’s nothing benign about the platinum coin. It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts.

As with true default, it proves to the financial markets that we no longer can be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.

Sadly, none of that actually is a reasonable argument against the platinum coin. The fact that we wish we were not a banana republic witnessing a full-blown meltdown of our treasured system of governance does not mean we are not, in fact, a banana republic witnessing a full-blown meltdown of our treasured system of governance.

The argument against minting the platinum coin simply is this: It makes it harder to solve the actual problem facing our country.

Per Business Insider, the deficit for 2013 is projected to be $845 billion, i.e., roughly $70 billion per month. Under QE2, the Fed was coining $110 billion per month in 2010 and is now, under QE3, coining $40 billion per month. So, exactly how could coining an average of $71 billion per month to cover that $845 billion 2013 deficit be “a breakdown in the American system of governance, a symbol that we have become a banana republic,” as the driven-to-hysteria Ezra Klein claims?

Some have even denounced quantitative easing as “printing money.” But, the Wikipedia tries to make this distinction:

Quantitative easing has been nicknamed “printing money” by some members of the media,[84][85][86] central bankers,[87] and financial analysts.[88][89] However, central banks state that the use of the newly created money is different in QE. With QE, the newly created money is used for buying government bonds or other financial assets, whereas the term printing money usually implies that the newly minted money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt).[84]

But, money coined by the Fed and indirectly loaned to the Treasury through quantitative easing gets spent by the Fed to defray government expenses, including the principal and interested on the national debt. So the Wikipedia is making a distinction that lacks a difference.

[*] “A lot can go wrong with a platinum coin,” Ezra Klein (1/11/13)

What do military units do? They find targets (a.k.a. surveillance) and service of targets, i.e., deliver warheads (chemical, biological, impactful, or explosive) onto targets. Each drone would have a camera (for surveillance) and/or a warhead (for servicing targets) — impact warheads (e.g., bullets) are not illegal and can easily be swapped for warheads of greater lethality when the going gets tough.

Unlike the current generation of government drones, these drones would not employ precision rocketry to cover the “last mile” to the target — if you think about it, a cruise missile is simply an expendable drone (except for the kamikazes, which were non-drone cruise missiles), and do-it-yourself drones are very expendable, i.e., they’re model airplanes with fancier software.

I would imagine such drones to operate as wolf-packs (i.e., swarms) and that, in times of need, they would operate as part of some kind of a well-regulated malitia against oppressor forces.

%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

All snark aside, I’m simply trying to draw attention to where this technology can (and likely will) go. And, remember, you can’t repeal technology. Per HuffPo (1/22/13):

WASHINGTON — As the technology for arming drones spreads around the world, terrorists could use the unmanned, missile-firing aircraft to attack and kill the president and other U.S. leaders, the former chief of U.S. intelligence said Tuesday.

Retired Adm. Dennis Blair, who served as President Obama’s first director of national intelligence, told reporters he was concerned that the proliferation of armed drones — a potential outgrowth of the U.S. reliance on drones to attack and kill terrorists — could well backfire.

“I do fear that if al Qaeda can develop a drone, its first thought will be to use it to kill our president, and senior officials and senior officers,” Blair said during a conference call with reporters. “It is possible without a great deal of intelligence to do something with a drone you cannot do with a high-powered rifle or driving a car full of explosives and other ways terrorists now use to try killing senior officials,” he said.

[...]

Emphasis added.

But, note that those aircraft don’t have to be “missile-firing.” They are (or can become) missiles themselves.

Trillion Dollar Coin

Ellen Hodgson Brown is a monetary-reform advocate. Per her website:

[She] developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book [updated January 2012], she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Brown developed an interest in the developing world and its problems while living abroad for eleven years in Kenya, Honduras, Guatemala and Nicaragua.

Her perspective is different from but compatible with Modern Money Theory (MMT). She writes extremely lucid articles that include a lot of historical (class-warfare) aspects of monetary policy.

Her latest article, The Trillion Dollar Coin: A Debt Solution for the People, was posted yesterday (1/17/13) at YES! Magazine. I consider it the best article yet on Platinum Coin Seigniorage and its continuing significance in our on-going class struggle:

[I]n 1862, President Abraham Lincoln boldly took back the power to create money during the Civil War. To avoid exorbitant interest rates of 24 to 36 percent, he decided to print money directly from the U.S. Treasury as U.S. Notes or “greenbacks.” The issuance of $450 million in greenbacks was the key to funding not only the North’s victory in the war but an array of pivotal infrastructure projects, including a transcontinental railway system.

After Lincoln was assassinated, however, the greenback program was quickly discontinued. Repeated popular attempts by farmers and laborers to revive it failed. They were opposed by a wave of banker activism to maintain the banks’ control over the printing of money, which had been established by the National Bank Act of 1863.

In 1872, New York bankers sent a letter to every bank in the United States. The letter, as quoted by Lynn Wheeler in Triumphant Plutocracy: The Story of American Public Life from 1870 to 1920, read in part:

Dear Sir: It is advisable to do all in your power to sustain such prominent daily and weekly newspapers…as will oppose the issuing of greenback paper money, and that you also withhold patronage or favors from all applicants who are not willing to oppose the Government issue of money. Let the Government issue the coin and the banks issue the paper money of the country. [T]o restore to circulation the Government issue of money, will be to provide the people with money, and will therefore seriously affect your individual profit as bankers and lenders .

Bank-created money, including paper bills and now electronic money, could be rented to the people at a profit. The people’s debt-free money was limited to coins, which today compose less than one ten-thousandth of M3, the broadest measure of the money supply.

Lincoln’s assassination and the abandonment of debt-free greenbacks marked the exchange of physical slavery for what has been called “debt peonage” or “wage slavery.” Today, as a result, the American government and American people are so heavily mired in debt that only a radical overhaul of the monetary system can free us.

The point is that the only money directly issued by our federal government are coins; all paper money and electronic money is issued by the banking cartel led by the Federal Reserve. From the above quote, it is clear that for more than a century there has been a bankers’ conspiracy to minimize the amount of government-issued money that interest-bearing bank money must compete with by confining the government to the issuance of coins. But, 31USC5112(k) is a gaping hole in their plot because it allows the government to issue coins of unlimited denominations:

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

Is it any wonder that most financial journalists are denigrating platinum-coin seigniorage as “silly,” “weird,” “juvenile,” “unserious,” “dangerous,” and “inflationary.” The bankers who understand what Ellen does are scared shitless of PCS. If you’re at all interested in this stuff, read her article.

UPDATE: Here, from Ellen’s article, is some interesting history the idea of using Platinum-Coin Seigniorage as an alternative to borrowing:

The idea of minting large-denomination coins to solve economic problems seems to have first been suggested by a chairman of the Coinage Subcommittee of the U.S. House of Representatives in the early 1980s. He pointed out that the government could pay off its entire debt with some billion-dollar coins. The Constitution gives Congress the power to coin money and regulate its value, and sets no limit on the value of the coins it creates.

That may have been true then, but in legislation initiated in 1982, Congress chose instead to impose limits on the amounts and denominations of most coins. The one exception was the platinum coin, which a special provision allowed to be minted in any amount for commemorative purposes.

[...]

Philip Diehl , former head of the U.S. Mint and co-author of the platinum coin law, confirmed that the coin would be legal tender: “In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8).”

Photo from DonkeyHotey licensed under Creative Commons

US Dollar Coin - Illustration

Article 1 Section 8 allows the government to acquire money to pay its bills in three ways: taxtion [Clause 1], borrowing [Clause 2], and coining of money [Clause 5]. And 31USC5112(k) allows the Treasury to mint arbitrarily coins of any denominations. For the past 220 years since the founding of the Treasury, the U.S. has covered its tax deficits by a combination of borrowing and minting, e.g., in 2011 the ratio was about 100 to 1. But, we are spending $250 billion per year in interest on our debt, so why not cover the entire deficit by minting trillion-dollar coins? Per Paul Krugman:

… at least as I understand it, the letter of the law [31USC5112(k)] would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt [borrow money].

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no.

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

Krugman has been making the claim that “in normal times” covering the deficit by issuing fresh money would be more inflationary than than raising the same amount of money by issuing (selling) Treasury bonds.

Other things being equal, in one case the private sector has X dollars of T-bond. In the other case, they instead have an additional X dollars of money in the bank. But note that banks are always happy to monetize T-bonds for a fee, either by buying them or by issuing loans against them. Yes, there is a slight loss of liquidity, that fee, but that gets compensated by the interest earned on the bonds. Frankly, I don’t see much difference, when it comes to bidding up the prices of assets and services. The best that I can say for Krugman’s claim is that all bonds lose value when interest rates go up, which they always do in times of inflation. So bonds do provide a stabilizing effect, if the Fed loses control of interest rates. But, meanwhile, interest the $250 billion per years is increasing and crowding out healthcare, food stamps, etc. And the national debt is providing people like Pete Peterson and his side kick Barack Obama with a boogey-man story to scare naive villagers into scrapping our social safety net.

I want to address specificially this claim by Krugman:

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought.

Let’s say that Krugman is correct. So what difference would it make if instead of T-bonds the Fed held the equivalent amount in platinum coin? If somehow de-monitizing T-bills fights inflation, i.e., trading them for real dollars, the Treasury could always sell the same amount of T-bonds at auction to provide the same T-bonds for money swap. The private sector doesn’t really care how fresh the T-bonds are or whether they buy them from the Treasury or the Fed.

Illustration by DonkeyHotey licensed under Creative Commons

An appropriation does not, however, issue money to cover the appropriated expenditure. Instead, Article 1 Section 8 gives Congress three powers to raise such funds: taxation [Clause 1], borrowing [Clause 2], and the minting of coins [Clause 5]. Congress has placed strict limits on the Treasury’s power to collect taxes and borrow money, e.g.:

The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $14,294,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX [1] of the Rules of the House of Representatives or as provided by section 3101A or otherwise. [31USC3101(b)]

This law gives any session of Congress the power to repudiate (renege on) expenses appropriated by previous sessions, which is of course immoral, unethical, and possibly unconstitutional under Amendment 14, which states that “The validity of the public debt of the United States, authorized by law … shall not be questioned.”

Congress has, however, explicitly granted the Treasury power to mint coins of arbitrarily large denominations:

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time. [31USC5112(k)]

Such coins are “legal tender” and can therefore be deposited into the Treasury’s General Account at the Fed, from which the Nation’s bills are ultimately paid. Therefore, there is no need for the Treasury to borrow money to meet the obligations of the United States. But, and this is critical, none of that money can be withdrawn except for congressionally appropriated expenditures; e.g., the Treasury cannot monetize the national debt except insofar as such expenditures are appropriated by Congress.

For the past 220 years, the Treasury has been paying a portion of each year’s expenditures via the markup (seigniorage) on the minting of coins — last year coin seigniorage covered about 1% of the tax deficit — Abraham Lincoln went even further and paid for the Civil War with printed fiat money (“Greenbacks”), as did the European powers to finance WW I, and as did Germany to finance its part in WW II.

All of the above is background to keep in mind the next time you read a financial/economic pundit declare that it would be “weird” for the Secretary of the Treasury to exercise his powers under 31USC5112(k) and recommend that he instead foment a constitutional crises by directly violating 31USC3101(b), which I think would be “weird” at best.

UPDATE: This just in from Reuters via HuffPo:

President Barack Obama vowed on Tuesday to avoid a repeat of last year’s divisive fight with Congress over an extension of the nation’s borrowing authority.

“While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up,” Obama said in remarks in the White House.

Conventional wisdom has it that, when Barack Obama says that something is non-negotiable, that’s a sure sign that it’ll soon be on the table. If, however, he really means this and this time has a plan other than caving, that plan will almost surely involve either violation of federal law or the use of the Treasury’s authority under 31USC5112(k).